Trend Analysis of the US Dollar and Guggenheim CurrencyShares ETFs

As currency markets respond to political developments in the US and Europe, and as central banks adjust their posture, the dollar is searching for a firmer bottom. I take a closer look at the US Dollar and currency ETFs, i.e. ETFs long a foreign currency and short the US dollar.

Chart 1: A trend-analysis of Bonds, Gold, S&P 500 and the US Dollar summarizes the current trend situation. The time interval starts at 25-days at the top and doubles at each step from top to bottom.

Trend Summary of Key US Markets

As US stocks have rallied over the past month or more, bonds and gold have backed off (for example, see Charts 5-8 of my last post). As we show in Chart 1, the third column is the S&P 500 Index, and our trend-following models are pointing higher across all time frames. (Earlier, the US market has pulled back on the short-to-medium time frame and bonds and gold had rallied). Hence, bonds and gold are trending lower in the short term (see top row, left-two dials). Bonds trends have turned neutral in the medium-term, even as gold has pulled into support. However, both bonds and gold are still trending higher in the medium-to-long term.

These changes in trends for risk-off assets have been reflected in the price of the long-US Dollar ETF (UUP), which is trending higher in the short- and-medium term (top two dials, right-hand column). Thus, you can see inter-market relationships at work here.

A Closer Look at the US Dollar ETF (UUP)

A longer-term daily chart of the UUP ETF (see Chart 2) shows it finding support at the 2015 December highs. UUP has been trading in a broad trading range, and we can see that there is a broad support zone, between the two lower horizontal lines, approximately at 23.75 - 24.50. The recent rally came to the top of the lower support line before finding resistance, as basic chart analysis tells us. Thus, we can hypothesize that the dollar (and hence the UUP) is in a broad bottoming process, trying to build a base between the two horizontal lines of support. The blue down-trend lines show the evolution of resistance during the two previous declines. That trend-line is near 25.0, so that we would have to overcome resistance shown by the third horizontal line around 25.-25.25 to start a new uptrend. Of course, the longer the base, the lower the trend-line break point, so these numbers will shift over time.

The CTM in the lower panel has just touched the bottom of the green region before turning level. This is typical of basing behavior as we can see in the two previous consolidations.

Chart 2: A long-term daily chart of the UUP with key support and resistance zones. The dollar is trying to build a base of support, but overhead resistance remains strong. (A live version of the chart is here.)

I applied my intermediate-term trend-following model to the UUP chart as shown in Chart 3. The 20-day moving average is still below the lower half-width 100-day Bollinger bands, though I expect it will move between the bands soon. Hence, the trend is still shown as down in Chart 1 (right hand-column, third row from top). The dashed purple trend-line shows over-head resistance. The 20-day moving average would have to climb above 24.5 (these numbers will shift) before the intermediate-trend will turn bullish. The chart shows this will take some time and effort. The Chande Trend Meter (CTM lower panel) is in the yellow region still, but has come off the down-trending region, so the base-building is going on in earnest.

Chart 3: An intermediate-term term look at the UUP prices shows that the intermediate-term trend is still lower, though it likely to turn flat as the 20-day moving average breaches the lower band. (A live version of the chart is here.)

Trend Analysis of Currency ETFs

The bottoming process in the US Dollar is reflected in the candle glance view of Guggenheim CurrencyShares ETFs. The British Pound is hostage to Brexit headlines. The Euro is coming to grips with the German election results as the Dollar responds to US Federal Reserve tightening moves. The Yen is grappling with an upcoming election in Japan, red-hot missile rhetoric, and rising equity prices. The Canadian Loonie is enjoying the rally in energy and Chart 4: The Chande Trend Meter has turned yellow for all of the currency ETFs after several months in the green region, as the dollar strengthens and the CurrencyShares ETFs come off their recent highs.

My trend-following models summary for the Guggenheim CurrencyShares ETFs in Chart 5 shows that the UUP and the currency ETFs are generally pointing in opposite directions as we should expect. Now, when you look at it on a currency-by-currency basis, the trend picture is a bit mixed at the longer time frames, and shows how the adjustment process reflects the relative currency differentials and relative fundamentals.

Chart 5: Trend-following model summary for the Guggenheim CurrencyShares ETFs versus the UUP long US dollar ETF. The UUP is trending higher in the short-to-medium term, and the short-dollar currency ETFs are either all trending lower in the short-term, but short-or-flat in the medium-term. Since intermediate- and long-term (200-day) trend is still lower in the UUP, it is correspondingly higher in the currency ETFs (bottom two rows: compare the right-hand column to the dials to the left). (Key: FXA= Australian dollar, FXB = British Pound, FXC = Canadian dollar, FXE = Euro, FXY=Japanese Yen, UUP = US Dollar).

Looking Ahead

The US equity markets are holding their breakout and trending higher, so we will just be along for the ride (see Chart 6). The picture is all green, and let us hope it stays there for a bit longer.

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Chart 6: The US markets are trending higher across all time frames and market breadth. The time-interval starts at 25-days at the top and doubles at each step from top to bottom. Market breadth increases from left to right, from 30 to over 2000 stocks in the particular index. (My trend-following models are here.)

About the author:Tushar Chande, PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI.
He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets.
Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions.
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